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Why the Pressure’s on for Retailers to Get Reverse Logistics Right

The holiday sales season is in full swing, and you know what that means: an avalanche of returns.

Dealing with returned goods is an inevitability for almost every modern retailer, and with online shopping accounting for an ever-greater share of sales each year, reverse logistics is becoming an increasingly important area for the industry to master.

While overall holiday retail sales are expected to rise between 4.3 percent and 4.8 percent this year according to the NRF, for a total of $717.45 billion to $720.89 billion, e-commerce spending is expected to climb 15.5 percent over the same period in 2017, according to Internet Retailer.

With online sales continuing to skyrocket, the returns associated with them are “staggering,” according to David Simon, CEO and chairman of Simon Property Group. “Everybody wants to say, ‘here’s the gross Internet sale,’ but they don’t want to tell you the net.”

In fact, data suggests around 30 percent of merchandise purchased online is returned, compared with around 10 percent bought in store. For categories like clothing and footwear—which customers tend to want to try on at home for fit and style—these rates can be even higher, and during the holiday season, the total volume of returns could top $90 billion, according to one 2017 estimate from logistics specialist Optoro.

So what are retailers to do? While some are looking to penalize serial returners, others are taking a different approach.

Zalando, the largest online fashion retailer in Europe, recently revealed that around 50 percent of the goods it sells are ultimately returned, and that the logistics and processing costs required to refurbish products to resell have already taken a bite out of its 2018 profits. Still, the company’s response wasn’t to make the returns process more onerous to discourage customers from taking advantage of it—instead, it is streamlining its own systems to manage the influx.

“That’s become the approach for a lot of retailers: that free shipping and free returns is industry standard, especially in categories like footwear and clothing,” said Sucharita Kodali, a retail analyst with Forrester Research. “It’s just the cost of doing business. People are using their homes as dressing rooms now, and you could try to reduce returns, but then you’re going to reduce your top line, too.”

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Rather than risk losing customers, retailers are finding ways to make the experience as seamless as possible, even if it requires some initial investment on their part.

For some retailers, that has meant partnering with third-party firms that specialize in tackling the problem. Happy Returns, for instance, operates a network of nearly 300 “return bars” around the country, giving their retail partners—generally digital-first brands—the opportunity to offer on-the-spot returns in places like shopping centers, national retailers, boutiques and college campuses.

As of this fall, the company has also expanded to what it calls “full stack returns,” a top-to-bottom solution that includes software for managing returns and exchanges, integrated in-person returns for brands with their own physical stores, returns by mail and a logistics system that aggregates merchandise and routes it to the appropriate location, whether that’s a store, a warehouse or a liquidator. Among the retail partners to sign on to the program so far are collegiate apparel line Hillflint, sustainable menswear label Outerknown and bed-and-bath brand Parachute Home, while others have cherry-picked from among the services.

David Sobie, co-founder and CEO of Happy Returns, calls reverse logistics “that next competitive battlefront,” after the fast, free delivery wars.

For giants like Target and Macy’s, the challenge is even bigger. For them, handling returns are almost never as simple as replacing an item—or even a group of items—on a store shelf. Yes, some returns will eventually make it there, but others will be rejected and passed on to the secondary market via salvage dealers, factory outlets and online liquidators that auction bulk inventory to business buyers.

The latter industry is surging with the rise of online shopping: B-Stock, the leading marketplace in the space, says it’s on track sell over 70 million returned or excess items this year, and has grown more than 100 percent annually on a compound basis since launching in 2009.

To first get the items back from customers, however, many of the country’s biggest retailers are also leveraging physical stores. Amazon has partnered with Kohl’s to give customers the option to return their purchases in roughly 100 of the department store’s locations across the country. Not to be outdone, Walmart recently added the option of returning merchandise purchased from third-party vendors on its online marketplace to any of its 4,700 stores. At Macy’s, At Your Service kiosks near high-traffic doors are designed to make both buy online, pickup in store easier, and to facilitate returns.

While numerous surveys have found that most customers prefer to return online purchases to physical stores, returns by mail and courier still account for a significant share of the total volume. According to the U.S. Postal Service, Americans returned between $113 billion and $132 billion worth of e-commerce purchases in 2017, and USPS alone handled 148 million return packages the prior year.

Recognizing an opportunity, the USPS Office of Inspector General published a report in April outlining how the postal service can gain a greater share of the returns market, noting that this is currently smaller than its share of the outgoing parcel market. This fall, USPS is piloting a return-to-store program that will consolidate items picked up from customers or dropped off at local post offices and return them directly to retail stores. Other ideas include accepting unboxed returns, which would cut down on the steps needed to process and consolidate returns, and partnering with a third-party logistics provider to add on capabilities like product assessment and liquidation, putting it on par with competitors like Fedex and UPS.